Rule of Three

Rule of Three

In their 2002 classic – “The Rule of Three: Surviving and Thriving in Competitive Markets”, Jagdish Sheth and Rajendra Sisodia presented a case that in any given market, at the end of the day, only three players survive or rather control 70 to 90 of the market. This is true across industries for e.g.

  • McDonald’s, Burger King, Wendy’s
  • General Mills, Kellog, Post
  • Nike, Adidas, Reebok
  • American, United, Delta
  • Bank of America, Chase Manhattan, Banc One

so, how does that apply to the mobile, esp. US. Clearly, there are three dominant players – Cingular, Verizon, and Sprint with over 75% of the market. T-Mobile and Alltel make up the 16% while 9% goes to the remaining operators. The strategy for the mid-size operator in this brutal business is to acquire or get acquired. So, far Alltel has been acquiring smaller carriers (most recently Western Wireless). Now they want to get acquired as competition has been stiff and they can’t reach the scale of big 3. Verizon and Sprint are the likley targets but Verizon is currently more intersted in buying their stake back from Vodafone and Sprint is struggling. Another option is for a private equity firm to take ownership, keep on growing and sell it to either carriers when the timing is right, since the business itself is doing good.

T-Mobile has so far bucked the trend and decided to duke it out on their own. It is the hottest property that DT owns and it is making a go at it with serious 3G infrastructure investments. With the market approaching 80% penetration, growth will slow down. It will be a different landscape in 2-3 years, when we will approaching 90%. Either of the smaller carriers are likely to exist in their current form at that time.

Similar trends are evident in the handset industry with Palm looking for an exit. Having created the industry of PDAs and smart devices, they were slow to adapt.